Harvey's Widespread Destruction Tests U.S. Shale -- Update

08/29/2017 | 10:02 pm

By Lynn Cook, Bradley Olson and Alison Sider

HOUSTON -- Tropical Storm Harvey, the most powerful storm to hit Texas in half a century, has shut a significant portion of the state's shale production, cutting off as much as 15% of U.S. oil supplies.

Now, in what is the first major storm to test U.S. shale, the big question is how quickly the sector can make a comeback.

As the storm's widespread devastation has come into focus, several analysts say that much, if not most, of the 1.4 million barrels of oil produced daily in the Eagle Ford shale of South Texas has been cut off and may not return for weeks. The Eagle Ford, which is on the doorstep of Corpus Christi where the storm made landfall, is second in output in the state only to the Permian Basin of West Texas.

Early indications from a handful of companies are that the severity of the storm was much greater than expected but damage to fields was moderate, according to Paul Sankey, an equities analyst with Wolfe Research. Many big shale producers in the Eagle Ford shut their oil and gas wells before Harvey made landfall as a hurricane Friday.

While some companies made efforts to restart production Tuesday, a snarled supply chain is keeping a lot of oil in the ground for now.

Shale producers rely on a vast, multibillion-dollar network of energy infrastructure -- from ports to train tracks to pipelines -- that has developed in recent years along the Texas coast. Many pieces of that network appear to be swamped, and since there hasn't been a storm of this magnitude since shale drilling took off about a decade ago, it is harder to predict how long it will take for the infrastructure to recover.

ConocoPhillips, one of the biggest producers in the area, normally pumps 130,000 barrels a day in the Eagle Ford; it shut its wells ahead of the hurricane. As of Tuesday, it had restarted some fields on a limited basis, but was struggling with the pipelines and trucks needed to take the crude away.

"The effect to shale could linger given the extent and catastrophic level of forecasted flooding, which interferes with shale logistics," said Benny Wong, an analyst with Morgan Stanley.

In the past, hurricanes have dealt a blow to the Texas energy industry by knocking out offshore oil platforms in the Gulf of Mexico; but in many cases, once storms passed, those big installations could quickly return to pumping crude.

The fracking-induced boom in Texas has heightened the state's role in the U.S. economy, which means that if the oil fields and surrounding infrastructure are out of service for long, it could have outsize economic impacts on the state and shave $20 billion or more off U.S. gross domestic product, said Joe Brusuelas, chief economist with RSM US LLP, an accounting and consulting firm.

More than 15% of U.S. refining capacity is closed in the wake of the storm. That prompted crude prices to drop more than 2.5% since Friday to $46.44 a barrel, largely because closed plants don't need to buy any crude.

If they stay shut, or if the ports where they are located sustained damage that takes weeks to repair, producers won't be able to turn their spigots back on. Prolonged refinery outages could lead to fuel shortages in different parts of the country.

Companies were trying Tuesday to assess the damage to their facilities. But the sprawling nature of the storm -- it was downgraded from hurricane status on Saturday -- and continued rain in some areas hampered those efforts.

Wind and water damage and outages from the storm have doused tens of thousands of square miles with torrential rainfall and ravaged a wide swath of coastline, halting the flow of up to $800 million a day in energy industry revenue, analysts said.

Corpus Christi and Houston are the two major exit points for U.S. oil, which is now shipped to the four corners of the globe.

"The biggest contribution of shale is that it has given the U.S. a much bigger foothold in the global picture as a supplier of oil, gas, petrochemicals and refined products all over the world," said Uday Turaga, chief executive of consultancy ADI Analytics.

As the hurricane's widespread devastation unfurled, some companies confirmed their operations had come to a near standstill.

EOG wouldn't quantify how much of its production is shut down, but the company said it is working to resume operations "where it is safe to do so."

Chesapeake said that "while it is premature to speculate on the ultimate impact to our production, we anticipate volumes will be restrained until Gulf Coast and Houston refineries are back online."

Shipping traffic in Houston, Corpus Christi and other ports may not be fully restored for two weeks. That and other infrastructure limitations will have a domino effect back to production, said Tony Sanchez III, chief executive of Eagle Ford operator Sanchez Energy Corp.

Restarting wells may not guarantee that they resume flowing at the same rate, he said. On a technical level he fears that shale wells, once shut off, could lose pressure. Most of his company's production wasn't shut in as it lies in areas west of the storm's path.

"It's not just a matter of flipping a switch," he said. "There is significant risk in those wells not coming back to previous levels."

The market may be underestimating Harvey's impact because nothing like this flood has ever happened to the shale industry before, said Giovanni Staunovo, a commodities analyst at UBS Wealth Management.